Senior Director of Federal Tax Policy
Policymakers will likely add a bipartisan package of tax provisions to end-of-year budget legislation. The restaurant and retail sectors continue to lobby for a “technical correction” of the 2017 tax law to be included in the package, and there are growing signs that Senate Republicans plan to include it. Policymakers, however, should accompany any provision to aid restaurant and retail owners with provisions to help millions of people who work hard for low pay in restaurants, retail stores, and elsewhere by expanding the Earned Income Tax Credit (EITC) and the low-income part of the Child Tax Credit.
Restaurants and retailers are seeking a technical correction that would give them “full expensing,” under which they can deduct the full cost of investments in qualified improvement property immediately rather than over many years. The 2017 law’s authors intended to include it in their bill but mistakenly left it out of the hastily drafted legislation.
Yet the 2017 law is deeply flawed in far more fundamental ways: it gave large tax cuts to wealthy shareholders and other affluent business owners while largely ignoring low-wage workers, whose wages have essentially stagnated in recent decades. Lawmakers shouldn’t repeat that policy mistake this year. The Economic Mobility Act, which the House Ways and Means Committee passed a few months ago, includes provisions to make the Child Tax Credit fully refundable — so that recipients can receive its full value even if it exceeds the income taxes that they owe — and provide a meaningful EITC for workers who aren’t raising children at home. (They would be in effect temporarily, like other provisions in the bill.) This bill shows how to strengthen these tax credits to boost the incomes of people on the lower rungs of the economic ladder.
The Child Tax Credit. The 2017 law included a highly touted $1,000-per-child increase in the Child Tax Credit (from $1,000 to $2,000 per child). But, under it, millions of low-wage working parents receive far less:
Under the 2017 law, the Child Tax Credit doesn’t start to phase in until a tax filer has more than $2,500 in earnings, and it then phases in slowly. And if a family’s Child Tax Credit would exceed the federal income tax it owes, the family cannot (under the 2017 law) receive more than $1,400 per child as a tax refund. Policymakers should, as the Economic Mobility Act proposes, make the Child Tax Credit fully refundable, to enable children in lower-income households to benefit fully from it.
The EITC for low-wage workers who aren’t raising children in their home. This credit is too small even to offset the income and payroll taxes that these workers must pay. That’s the main reason why the federal tax code taxes more than 5 million such workers aged 19-65 — including 1.8 million who work in restaurants or retail — into or deeper into poverty (see Table 2 for state-by-state figures).
Despite longstanding bipartisan support to boost the EITC for these workers (including from former Republican House Speaker Paul Ryan), the 2017 tax-cut law failed to include it. (Indeed, the 2017 law reduced the inflation-adjusted value of the EITC over time, including the small EITC for childless workers, by adopting a different measure for adjusting tax brackets and various tax provisions each year to account for inflation.) The Economic Mobility Act’s provision to strengthen the EITC for these workers would not only benefit the 1.8 million childless workers employed in restaurants or elsewhere in retail who now are taxed into, or deeper into, poverty, but it would provide a boost to millions of low-paid workers in other sectors as well.
The authors of the 2017 tax law omitted full expensing for restaurant and retail business owners inadvertently, but they left out these Child Tax Credit and EITC improvements for low-wage workers by design. Ignoring these workers in 2017 reflected unbalanced policy; ignoring them again now would compound the inequity.
|Left Out of the 2017 Tax Law: Children Not Receiving the Full Child Tax Credit Increase Who Have Parents Working in the Restaurant or Retail Industries, by State|
|State||Receive a Token Increase of $75 or Less Under 2017 Law||Receive More Than $75 But Less Than the Full $1,000-per-Child Increase Under 2017 Law|
|Dist. of Columbia||6,400||4,000|
|Left Out of the 2017 Tax Law: Childless Adults Currently Taxed Into or Deeper Into Poverty Who Work in the Restaurant or Retail Industries, by State|
|Dist. of Columbia||2,600|